Bloomberg News

Bears Shut Up by Data as Dollar Sales Reach Record: China Credit

January 24, 2013

Chinese corporate dollar-denominated bond sales are off to a record start as an accelerating economy allays default concerns, driving down borrowing costs by the most in Asia.

Yuexiu Property Co. (123), whose projects include the Guangzhou International Finance Center, led $5.35 billion of offerings since Dec. 31, according to data compiled by Bloomberg. Average yields on Chinese issuers’ dollar debt have dropped 417 basis points to 5.49 percent from a year ago, surpassing the 322 slide in India and the 189 decline in South Korea.

“The economic data since November has shut many China bears up,” said Tim Jagger, fixed income portfolio manager at Aviva Investors Asia Pte, which manages $282 billion in global fixed income assets as of September 2012. “China’s property companies have never had the opportunity to fund at such attractive rates.”

Global investors are offering Chinese borrowers the lowest dollar premiums in 20 months, as they seek higher yields in the emerging markets, with interest rates near zero in the U.S., Europe and Japan. The bullish tone contrasts with concerns expressed by China skeptics after average yields on dollar company bonds surged to 9.66 percent in January last year.

Hugh Hendry, founder of the London-based hedge fund Eclectica Asset Management LLP that returned 31 percent in 2008 betting against U.S. growth, said last year that a real-estate bubble may derail China’s boom. Jim Chanos, who oversees $6 billion as the founder and president at Kynikos Associates Ltd., said in an interview with Bloomberg last month that “there’s a credit bubble going on.” Chanos also flagged concerns that profits at Chinese companies may be “skimmed to the benefit of the elites.”

Economic Recovery

The world’s second-biggest economy accelerated for the first time in two years last quarter. December data showed advances in home prices and the biggest rise in retail sales in nine months. Prices for new residences rose in 54 of the 70 cities the government tracks, the most in 20 months, according to data from the statistics bureau on Jan. 18.

Chinese developers have offered $4.95 billion of bonds in the U.S. currency this year, making January their busiest month on record. Yuexiu Property sold $850 million in a two-part sale of five-year and 10-year notes, its longest bonds ever and its first publicly sold notes in a decade.

Funding Expansion

“Developers have realized better sales volumes so sentiment in the sector has improved,” said Crystal Zhao, a fixed-income analyst at HSBC Holdings Plc. “That’s why it’s easier for these borrowers to come to the dollar space at a relatively cheaper cost than before.”

The average yield premium Chinese real estate companies pay has plunged 234 basis points, or 2.34 percentage points, in the past 12 months to 220 basis points over benchmark rates as of Jan. 24, Bank of America Merrill Lynch indexes show. That compares with a 100 basis-point fall to 157 for developers globally.

Chinese authorities have raised down-payment and mortgage requirements, imposed a property tax for the first time in Shanghai and Chongqing, and enacted home-purchase restrictions in about 40 cities.

Twelve developers from China have sold dollar bonds this year despite the regulations, fueling speculation that others will pile on as property sales rebound.

Longer Tenors

“At least in the China property space, there’s definitely a sense that there is some indigestion because people expect a huge pipeline,” said Brayan Lai, an analyst in emerging-market credit trading at Jefferies Group Inc. in Singapore. “Almost any issuer with a 2014-2015 bond or convertible might try to prefund their refinancing needs right now and, in addition to that, some are building a war chest for acquisitions.”

Government, corporate and consumer debt in China likely rose 15 percentage points in 2012 to an estimated 206 percent of gross domestic product, according to a November report from Standard Chartered PLC. In 2003, it stood at about 150 percent, according to the report.

Chinese companies have still been able to sell longer-dated debt to lock in cheaper financing. Country Garden Holdings Co., the developer controlled by China’s richest woman Yang Huiyan, sold its longest-dated bond on Jan. 10, a $750 million 10-year note at a yield of 7.5 percent.

Agile Property Holdings Ltd. (3383), whose first project in 1992 was in Zhongshan in the southern province of Guangdong, sold the first perpetual note for a Chinese company this year. Fosun International Ltd. (656), the Shanghai-based steel-to-pharmaceutical conglomerate, sold $400 million of seven-year securities at a yield of 6.875 percent on Jan. 23.

Default Swaps

China’s economic growth is buoying appetite for riskier assets and the country’s currency. Gross domestic product expanded 7.9 percent in the three months through December, up from 7.4 percent in the previous period.

The benchmark 10-year government bond yield has climbed to 3.58 percent from as low as 3.24 percent on July 11. Top-rated corporate debt with similar maturities pays 5.27 percent, down two basis points this year.

The yuan touched 6.2124 per dollar last week, the strongest level since the government unified the official and market exchange rates at the end of 1993.

The cost of insuring China’s debt against non-payment with credit-default swaps has fallen 1.3 basis point this year to 65 basis points, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. It is down from as high as 145.9 last year.

New Funds

Average premiums on dollar notes sold by companies in Asia fell to a 20-month low of 245 basis points more than Treasuries on Jan. 7, according to JPMorgan Chase & Co. Indexes.

Flows into emerging-market bond funds hit a 50-week high in the week to Jan. 18, according to data provider EPFR Global.

“People have cash to deploy, global interest rates are low and anecdotally we keep hearing that there are new funds being launched every day to invest in the market,” said Neal Capecci, a Hong Kong-based senior director for fixed income at Manulife Asset Management. “There’s just a lot of cash chasing this sector right now.”

To contact the reporter on this story: Tanya Angerer in Singapore at tangerer@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net


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